The first thing you need to think when you are planning to raise money from investors is “What is my startup worth?” Its like until you put a price on something you cannot sell it and as you are planning to sell equity in your startup in return of investment, it becomes necessary that you determine your company’s worth. How and on what basis it is done is discussed below.
When you are looking for funds you are now a part of a large club of startups in the same boat, who all wonder how much their startup is worth. And usually the valuations are done by the investment firms and that is how you can start with the bidding wars if you have more than one investors showing interest in your company.
Things considered in valuating the startup
- Revenue – If revenues are there then calculations becomes much easier and it may start from some where around 10x of the revenues you are making annually . And then depending on the idea, Team & scalability the valuation can increase.
- The Team – It not just the brilliant idea that matter but who will be implementing that idea and whether they have the capability and experience to do it matters and will affect the valuation.
- Growth & Scalability – Some companies will just pitch the potential for growth, such as a large market, and some will already be able to show traction. If month-over-month active users or paying customers is rising fast then it can boost your valuation as it is considered to be a metric for revenue predictions, it will play a part in defining a company’s value.
Things VC’s think while valuating a Startup
- Competition – Think like an auctioneer. Have other investors invested in this sector? Is it hot industry? Usually the startup is worth whatever the market will bear. This means a company with no revenues should use comparables from companies that have recently been funded. Look for similar companies like yours who got funded, to know the price tag you should put on your startup. No wonder when one e-commerce company gets funded, 100 other similar companies emerge.
- Investment Strategy – Most of the time investors have their own plans of investment, say they have $100M and want to invest in 10 companies, i.e $10M each company and they want to get at-least 20% of the company then they will value the companies accordingly. Check out the tool to calculate the % share of the founders and investor based on pre-money valuation. But this comes only after the investors have evaluated all other criteria that can make a startup successful.
- Potential Exit – VC firms assess exit routes by analyzing the market trends and patterns. How big of a returns can they expect from the sector that you are working and if any other company have followed suite and made a successful exit.
Valuation of an early-stage company is a profound challenge because most of the value reflects future performance and market conditions. And VCs don’t need help on this point—they know how to protect themselves. Read how you can protect yourself too when signing the termsheet.